Inventory Basics

Inventory-A physical resource that a firm holds in

stock with the intent of selling it or transforming it
into a more valuable state.
Inventory is created when the receipt of
materials, parts, or finished goods exceeds
their disbursement.
Inventory is depleted when their disbursement
exceeds their receipt
Represents as much as 50% of invested capital
at some companies
Types of Inventory

Process

Process
Why Holding Inventory ?
qImprove customer service
qEconomies of purchasing
qEconomies of production
qTransportation savings
qHedge against future
qUnplanned shocks (labor
strikes, natural disasters,
surges in demand, etc.)
qTo maintain independence of
supply chain
qReduce certain costs such
as
Øordering costs
ØStock-out costs

q
Why NOT Holding inventory?
qInventory holding cost
qcost of customer
responsiveness
qcost of coordinating
production
qTakes up valuable factory
space
Especially for in-process
inventory
qComplacency
qInventory deteriorates,
becomes obsolete, lost, stolen,
etc
qInventory covers up
“problems” … Lengthy Bad
That are best exposed Setups
and Design Poor
solved Quality

Inefficient Machine Unreliable

Layout Breakdown Supplier
Zero Inventory?

qReducing amounts of raw

materials and purchased
parts and subassemblies by
having suppliers deliver them
directly.
qReducing the amount of
works - in process by using
just-in-time production.
qReducing the amount of
finished goods by shipping to
markets as soon as possible
Inventory Management
Inventory management is the
planning and controlling of
inventories in order to meet
the competitive priorities of
the organization.
Inventory Control
Models
Economic order quantity ( EOQ )
EOQ minimizes the sum of
holding and setup costs

Q = 2DCo/Ch
D = annual demand
Co = ordering/setup costs
Ch = cost of holding one unit of
inventory
Total Cost of Inventory – EOQ Mod

Holding
Costs

Minimum
Costs

$ Ordering
Costs

EOQ

Units
 EOQ Inventory Order Cycle

Demand
rate Order qty, Q
Inventory
Level

ave = Q/2

Reorder R

0 Lead Lead Time

time time
Order
As Q increases, average Order Order Order
inventory level Received
increases, but number of Placed Received Placed
orders placed decreases
 Materials Management

Definition - Materials management is

the planning and control of the flow
and stock of materials to support
production.
Materials Management Activities
◦ Materials planning and scheduling
◦ Purchasing
◦ Transportation
◦ Warehousing
◦ Inventory control
◦ Salvage and scrap disposal


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